If you’re living the dream and have built your own business, you know the perks of being self-employed. You likely don’t have any employees to worry about and you’re your own boss. There’s no performance reviews and you can give yourself a raise any time you want. Unfortunately, when it comes to your ability to get approved for a mortgage, things get a little trickier. Many lenders view self-employed workers as riskier borrowers, even if you’ve had consistent income from your business for years. As a result, you might have to deal with less than ideal borrowing terms and higher interest rates. So, what can you do?
Well, we’ve got your back. Below, we’ll dive into some ways that will make it easier for you to get approved for a home loan and move into a dream property.
Step 1: Get All Your Ducks in a Row
If you’re trying to get a home loan, it’s best to sort through that mess of paperwork on your desk and get organized. You’ll need easy access to your bank statements, debt-to-income ratio, down payment details, and other evidence of your financial situation. Get organized as early as possible so you have plenty of time to track down exactly what documents you need.
Another important step is getting rid of any outstanding debts. Your car loan, student loan, and credit card debt should all be paid off or be paid off as soon as possible. Why? Because if you have a lot of debt, that can be a serious drawback on a loan application.
Step 2: Make Sure Your Business is as Legitimate as Possible
To get yourself in the best possible position to be approved for a loan, you’ll want to show that your business is legitimate. So, go through the work of registering and licensing your business. Give yourself an official W2 and reduce your tax deductions.
Separate your business and personal accounts (which also making writing off expenses considerably easier). Keep track of all your business costs, transactions, and income.
Step 3: Plan Out Your Strategy
Although big banks might have a lot of money to work with, that doesn’t mean they’ll want to work with risky borrowers. You might have better luck working with a smaller financial institution like a credit union. This is especially true if you’re an existing customer.
It’s also a good idea to plan to put down a larger down payment, potentially by tapping your 401(k). This can help assuage lender fears that you can’t afford a home purchase.
Step 4: Look for Alternative Financing
Yes, you might be able to qualify for non QM loans. Non-QM stands for “non-qualified mortgage” and gives people like self-employed workers or gig workers the change to get a loan. Instead of traditional income verification, your financing is based on approval through bank statements or assets. These types of loans have much more flexible qualification requirements. Non-QM loans can be the following:
- Bank statement loans: Self-employed workers can qualify for a mortgage using bank statements which count as income verification.
- Asset-based loans: For this type of loan, a borrower can use assets like checking and saving accounts, investment accounts, or money market accounts to get a loan.
- Jumbo loans with 5% down: For those with high debt and not-great credit, this loan gives you an option to finance a house purchase.
Step 5: Accept That Your Mortgage Might Be a Little More Expensive
Although you might make decent money as a self-employed worker, sometimes that’s not enough for a lender. You may have to pay for a higher interest rate and be okay with a lower home loan amount. But don’t fret, you can always refinance your loan later after a period of on-time mortgage payments.
Conclusion: Buying a House When You’re Your Own Boss
As someone who is self-employed, it’s important to know that you’re going to need to put in a lot of work in order to buy a home. But that doesn’t mean it’s impossible! Before you even start the house hunt, make sure that you get all of your finances cleaned up. Get rid of debt and separate your business and personal accounts. Using this article as a guide, you can find and buy a home successfully. Your home is out there waiting!